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Currency Risks in Investments
The majority of people in Singapore will probably earn their income in Singapore Dollars (S$) and spend most of it in S$ as well.
For people like us, it then makes sense to plan our finances using S$ as the base currency.
If you invest into overseas assets, you would want to know what is your returns in S$ terms because that is your bottomline. Ultimately, you will be spending all the returns in S$.
If the currency of the asset that you are invested in depreciates, your investment would need to give a higher return for your investment to be worthwhile. Therefore, when you invests into overseas assets, you will want a higher premium for the returns as there is always the risk of currency movements wiping out your returns.
Of course, if the currency goes in your favor, your returns will end up being higher.
We can use the US Dollars (US$) as an example.
Let’s say you bought stocks valued at US$100,000 twenty years ago. The exchange rate back then was about 1.90. So, the value of your investments is S$ terms is S$190,000.
If the stocks are now worth US$122,000 today, you would have achieved a total return of 22% or 1% p.a. annualized (measured in US$).
However, based on the exchange rate of 1.32 today, if you converted your stocks back to S$, it would be worth only $161,040. This is a loss of $29,000. Measured in S$ terms, that is a 15% total loss or -0.82% p.a.
The 30% drop in the value of USD had made a 37% difference to the returns or a good 1.8% p.a.
If someone asked you about the performance of your investments, would you say your investments returned 22% in USD terms or -15% in SGD terms? I think most of us will still use the SGD version never mind the fact that USD is widely used as an international currency.
Actually, reporting performance returns in another currency can be a good way of window dressing results.
If I had kept S$10,000 under my pillow twenty years ago, my returns today would be 0% p.a. in SGD terms. Measured in USD terms, the same magical pillow would have given me returns of 1.8% p.a. 🙂